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Money flowing into exchange-traded funds (ETFs) in Asia is expected to continue unabated in 2018, as the growing popularity for the low-fee products pushes assets to new records.

With emerging markets seen as cheaper and as a better source of potential returns than developed markets, Rick Chau, head of Asia/Pacific at STOXX Ltd., predicts inflows across the region in 2018 will build on last year’s.

Excluding Japan, investors allocated $6.5 billion of net new money into ETFs and exchange-traded products (ETPs) listed in the Asia/Pacific region last year, to reach a record $170.3 billion in assets, data compiled by research firm ETFGI show. Assets grew another $14 billion in January, the biggest monthly increase on ETFGI’s records.

“It started with the large institutions and now retail investors are slowly coming on board,” Chau said in an interview with PULSE ONLINE. “Asia has lagged in the uptake of ETFs compared to the U.S. and Europe, but you will see faster growth.’”

The increasing popularity of smart-beta products in Asia is boosting ETF assets, as institutional investors look to generate alpha without the added risk or expense of an active fund. Chau says investment mandates from pension funds are getting bigger, and the price of passive products continues to drop.

Below are some further comments from Hong Kong-based Chau during a conversation with PULSE ONLINE:

How competitive is the industry in Asia? “Very. The biggest ETF market in Asia is Japan, followed by China, Hong Kong, Korea, Australia and Taiwan. These countries are also where the growth is going to be.

“All the large, global fund providers are in Asia and are offering passive solutions to institutional clients. That trend is going to continue as the low-fee products become increasingly popular among institutions and retail investors in the region.

“The switch from active to passive is going to gain a lot more momentum as time moves on. I am fairly certain that down the track, a lot more asset managers will move into the passive space. They can’t afford to miss out.”

How are institutions in the Asia/Pacific region using ETFs? “It depends on the type of institution and where they are based. There are varying degrees of sophistication in this region. Many are trying to get tactical exposure to certain markets or sectors, or they use ETFs as a place to park funds temporarily. Those types of investors would be looking to invest in more broad-based ETFs.

“Sovereign wealth funds tend to look for more sophisticated instruments. These could allow a pure mandate play where they want specific exposure to certain assets or markets. Often they want an index created for them.

“There are smaller funds that are constrained by local regulation and are required to hold mainly domestic bonds, with a small exposure to equity. Or those that have a funding problem and are looking to invest in alternative risk premia, where they can use an index to draw higher returns but at a lower risk rate.”

Where is STOXX positioned amid this growth in passive investments? “We are innovators in the index space. We want to be where clients are just starting to think of going to next. For example, in January, we launched the world’s first Artificial Intelligence index with an AI-run methodology. Thematic areas where we are focusing on and where we believe the market is going to move to for both active and passive include robotics, ageing population, digitalization and healthcare.”

Lastly, how is investor sentiment in the region after a volatile start to the year for markets? “Sentiment is still pretty decent. We haven’t experienced any major corrections, even though volatility is back. From a business point of view, sentiment in some areas is at a three-year high; so, barring an Armageddon scenario, Asia is the place to be for investors.

“A lot of our Asia-based clients are also optimistic about the prospects for Europe, despite what’s happening over there with Brexit and the inconclusive Italian elections. The European economies are continuing to grow, and our clients are looking for exposure to the region, albeit in a passive capacity.”